Chapter 3 student

Chapter 3 student - National Income Production,...

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Unformatted text preview: National Income Production, distribution and allocation 2 Objective and topics Objective: examine determinants of national income production and how it is distributed Topics Production function concepts Payments to the factors of production Demand for goods and services The role of interest rates Equilibrium and the impact of selected variable changes 3 4 Production of goods and services Production function in the general Q = F(X1, X2, X3Xn) where Q is output and X1Xn represent the inputs and available technology returns to proportion represent what happens when one input changes and the others are held constant - diminishing returns marginal product - change in q for a unit change in an input holding other inputs constant ( ) 1 1 X Q X MP = 5 The Marginal Product of Labor Labor units Total Product Marginal Product 1 10,000 10,000 2 25,000 15,000 3 45,000 20,000 4 60,000 15,000 5 70,000 10,000 6 75,000 5,000 7 78,000 3,000 6 The Marginal Product of Labor 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 1 2 3 4 5 6 7 Units of Labor Total Product Marginal Product 7 The short-run output Let Y, national output, = Q K = (capital) L = (labor) the overbar denotes the quantities are fixed With both fixed then: __ K __ L = __ __ __ , L K F Y Over time, we can change the values for K, L and hence Y. 8 Production concepts Returns to scale(a long run concept) - when all the inputs are changed by the same proportion (e.g. doubled) constant increasing diminishing we will generally assume constant returns to scale ( ) 2 1 2 ... 2 2 X X f Q = ( ) 2 1 2 ... 2 2 X X f Q < ( ) 2 1 2 ... 2 2 X X f Q > 9 Distributing Income to Factors of Production The concept of a competitive firm goal is to maximize profits = revenue - costs small relative to market prices dictated by the market factor prices are given every firm has the same information 10 How much labor will the firm use? This will be determined by: the fixed input level the productivity of the variable input the price of the product the cost of the variable input 11 From Marginal Product of Labor to Labor Demand Labor unit Total Product Marginal Product Price * Marginal Product (MRP) Wage rate 1 10,000 10,000 20,000 10,000 2 25,000 15,000 30,000 10,000 3 45,000 20,000 40,000 10,000 4 60,000 15,000 30,000 10,000 5 70,000 10,000 20,000 10,000 6 75,000 5,000 10,000 10,000 7 78,000 3,000 6,000 10,000 P = 2, W = 10,000 12 The demand for labor 5000 10000 15000 20000 25000 30000 35000 40000 45000 1 2 3 4 5 6 7 Units of labor MRP Wage Y output MPL and the production function L labor F K L ( , ) 1 MPL 1 MPL 1 MPL As more labor is added, MPL Slope of the production function equals MPL Diminishing marginal returns As a factor input is increased, its marginal product falls (other things equal)....
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Chapter 3 student - National Income Production,...

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